Missed Opportunities for Married Couples Trying to Save
Written by: Allison Berger
We work with a lot of couples to help them plan for their long term goals. In some cases, we work with couples who keep their financial lives separate. Often this is the case with newlyweds who have yet to combine accounts and are not quite comfortable sharing all of their financial details with their spouse yet. It can even be the case with couples in their 50s and 60s who have kept separate accounts for many years.
In any case, planning for your financial future together is essential. Not only because financial issues are one of the leading causes of fighting in relationships, but also because planning separately can lead to significant missed opportunities that can negatively impact your wealth.
Below we list some of the common missed opportunities when married couples fail to take a holistic view of their financial picture:
Best Use of Retirement Contributions
If both spouses are employed, it is important to evaluate the retirement plans available from each employer. One may have a more generous match or very high costs. If you are not able to maximize contributions to all accounts yet, then it may make sense to fund one plan to a higher extent than the other. Investment choices are also fairly limited in employer sponsored plans, so one plan may have a great foreign choice while the other has low cost index funds or a generous fixed account. Looking at the whole picture together can allow you to build a more balanced portfolio while taking advantage of efficiencies that can boost your long term net worth.
Double Roth IRAs
Roth IRAs are the gold standard of savings accounts. Contributions go in after tax, growth is tax free, and withdrawals are completely tax free in retirement. You can also always withdraw your contributions tax and penalty free. This makes them a great tool for college savings and as back up emergency funds. However, in order to be eligible to contribute your AGI has to be <$184-194k for Married Filing Joint couples. In many cases we find that increasing retirement contributions a few percentage points, taking advantage of an HSA, FSA, or deferred compensation plan will bring a couple into eligibility for this valuable savings tool.
In some cases, when one spouse earns less than the other they can feel like they are not “contributing to the household” as much when their retirement contributions go up since their take home pay goes down. However, increasing retirement contributions in order to make Roth IRA contributions will have a net positive effect on their net worth. This is a very powerful tool to improve your long term financial situation.
Access to a 457 Plan
In the same vein as retirement contributions, certain employers (state or local government or tax-exempt organizations) offer access to a 457 plan for retirement. These plans are unique in that contributions to 457 plans are not classified as salary deferrals by the IRS. Therefore, if you participate in a 403b or 401k plan and a 457 plan you can contribute $18k to the 401k or 403b AND $18k to the 457 for a total of $36k pre-tax retirement contributions in one year ($24k/$48k for those over age 50). This can lead to a huge reduction in taxes now and put your retirement plan into hyper drive.
The problem is, most state and government workers, besides doctors and lawyers, don’t make enough money to defer that much toward retirement. But, they might have a spouse who makes a higher income. This might allow the lower earning spouse to defer the majority of their salary toward retirement pre-tax while the other spouse’s income supports the day to day expenses. For super savers, this may also bring you into Roth IRA eligibility, a savings trifecta.
So far we have discussed retirement contributions that can decrease your taxable income. There are also tax benefits that come with being married like writing off one spouse’s business losses on the joint tax return and leaving assets tax free to your spouse at death.
We all know that life insurance is necessary for young couples raising a family, particularly on the primary wage earner. It may also be important to hold a policy on a spouse who stays home with young children, since a premature death could necessitate additional expenses for the surviving spouse. Later in life insurance can also be used to allow for a higher lifetime payout from a company pension. In most cases pensions are offered with multiple choices for survivor benefits. These all come at a cost of course and if the pensioner is relatively healthy, holding a life insurance policy for present value of the income stream may be a cheaper option.
Social Security Claiming Strategies
Last but certainly not least is Social Security. This is definitely a financial decision you want to make as a couple. About a third of people claim benefits at age 62, but in many cases this leaves a lot of money on the table, particularly if there is an age difference between spouses. If one spouse has a longer life expectancy than the other, it may make sense for the higher earning spouse to delaying claiming benefits until age 70. This would allow the surviving spouse to receive that higher benefit over the course of their lifetime.
Social Security is also an important consideration for divorced spouses. If you were married for more than 10 years and never remarried, you are still eligible for benefits based on your spouse’s earnings history. This may be more beneficial than receiving your own benefits. You are also eligible to receive your ex-spouse’s full benefit upon their death. This is a benefit you do not want to miss out on.
Building a Better Index With Strategic Beta
Written by: Yazann Romahi, Chief Investment Officer of Quantitative Beta Strategies and Lead Portfolio Manager of JPMorgan Diversified Return International Equity ETF at J.P. Morgan Asset Management
With the global economy warming up, but political uncertainty remaining a constant, it’s more important than ever for investors to position their global portfolios to navigate long-term market volatility. That’s where the power of diversification comes in, says Yazann Romahi, Chief Investment Officer of Quantitative Beta Strategies at J.P. Morgan Asset Management and Lead Portfolio Manager of JPMorgan Diversified Return International Equity ETF (JPIN).
Not all diversified portfolios are alike
In their search for diversification, many investors turn to passive index ETFs, which track a market cap-weighted index. But these funds aren’t always the most effective way to steer a steady course through volatile markets—and there are two key reasons why.
First, traditional market cap-weighted indices are actually less diversified than investors may think. For example, in the S&P 500, the top 10% of stocks account for half the volatility of the index. Within sectors, while you might assume that sector risk is distributed across the ten major sectors fairly evenly, it is a surprise to many that at any point in time, one sector can be as high as 50% of the risk.
Second, cap-weighted indices come with some inherent weaknesses, including exposure to unrewarded risk concentrations and overvalued securities. So, while these indices provide investors with exposure to the equity risk premium and long-term capital growth, as is the case with any other investment, investors can also experience painful downturns, which increase volatility and reduce long-term performance. For investors seeking equity exposure with broader diversification—and potentially lower volatility—strategic beta indices may be better positioned to deliver the goods.
How do we define strategic beta?
Strategic beta refers to a growing group of indices and the investment products that track them. Most of these indices ultimately aim to enhance returns or reduce risk relative to a traditional market cap-weighted benchmark.
Building on decades of proven research and insights, J.P. Morgan’s strategic beta ETFs track diversified factor indices designed to capture most of the market upside, while providing less volatility in down markets compared to a market cap-weighted index. Rather than constructing an index based on market capitalization—with the largest regions, sectors and companies representing the largest portion of the index—our strategic beta indices aim to allocate based on maximizing diversification along every dimension—sectors, regions and factors. The index therefore seeks to improve risk-adjusted returns by tackling the overexposure to risk concentrations and overvalued securities that come as part of the package with traditional passive index investing.
So, how do you build a better index?
As one of just a few ETF providers that combine alternatively-weighted and factor-oriented indices, our disciplined index methodology is designed to target better risk-adjusted returns through a two-step process.
First, we seek to maximize diversification across the risk dimension. This essentially means that we look to ensure risk is more evenly spread across regions and sectors, which balances the index’s inherent concentrations. As uncontrolled risk concentrations are unlikely to be rewarded over the longer term, we believe investors should strive for maximum diversification when constructing a core equity exposure.
Second, we seek to maximize diversification across the return dimension. Research shows that there are a number of sources of equity returns beyond growth itself. These include risk exposures such as value, size, momentum and quality (or low volatility). When creating a diversified factor index in partnership with FTSE Russell, we seek to build up the constituents with exposure to these factors. We therefore select securities through a bottom-up stock filter, scoring each company based on a combination of these return factors to determine whether it is included in the index. These factors provide access to a broader, more diversifying source of equity returns as they inherently deliver low correlation to one another, providing diversification in the return dimension.
So, whereas traditional passive indices allow market cap to dictate allocations, the diversified factor index seeks to ensure that we minimize concentration to any source of risk—whether it be region, sector or source of return.
How are you currently weighted versus the market cap-weighted index, and how have your under- and over-weights enhanced risk-return profiles?
Crucially, our weightings don’t reflect specific views on sectors or regions and are instead, by design, the point of maximal diversification. It is important to remember that market cap-weighted indices typically carry a lot of concentration risk—for example, at various points in time, a single sector can explain half the risk of the index when left unmanaged. At the moment, three sectors explain two-thirds of the risk of the FTSE Developed ex-NA Index—these being financials, consumer goods and industrials. In contrast, the FTSE Developed ex-NA Diversified Factor Index—or strategic beta index, which JPMorgan Diversified Return International Equity ETF (JPIN) tracks—is explicitly designed to maintain balance and therefore these sector allocations range from 8% to 12%. In the short term, any concentrated portfolio can of course outperform a more diversified one, if the concentrated bet paid off.
Investing wholly in a single stock may outperform over short-term periods. At other times, it may significantly underperform an index. However, it is well understood that an investor is better off diversifying across lots of stocks for better risk-adjusted long-term gains. The same applies here. From a pure return perspective, if financials, for example, account for half of a cap-weighted index in terms of market cap and have a strong run over the short term, of course, this index would outperform over this period. Over the long run, however, it is fairly uncontroversial to suggest that the more broadly diversified index could achieve better risk-adjusted returns.
Seeking a smoother ride in international equity markets?
For investors targeting enhanced diversification through a core international equity portfolio, JPMorgan Diversified Return International Equity ETF (JPIN) targets lower volatility by tracking an index that more evenly distributes risk, enabling them to get invested—and stay invested.
Learn more about JPIN and J.P. Morgan’s suite of strategic beta ETFs here.
Call 1-844-4JPM-ETF or visit www.jpmorganetfs.com to obtain a prospectus. Carefully consider the investment objectives and risks as well as charges and expenses of the ETF before investing. The summary and full prospectuses contain this and other information about the ETF. Read them carefully before investing.
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